In 2014, the Delaware Supreme Court affirmed in Kahn v. M&F Worldwide Corp., 88 A.3d 635 (MFW II), that the business judgment rule would apply to controlling stockholder “squeeze-out” mergers if the transaction is conditioned ab initio on the approval of both an empowered, independent special committee and a fully informed, uncoerced majority-of-the-minority vote.

However, the decision did not address whether the MFW II standard would allow the business judgment rule to apply to the sale of a controlled company to an unaffiliated third party where the controller received disparate consideration or other “side deals.”

The Delaware Court of Chancery recently addressed this open issue in In re Martha Stewart Living Omnimedia, Inc. Shareholder Litigation, C.A. No. 11202-VCS (Del. Ch. Aug. 18, 2017), confirming that the business judgment standard of review can apply at the pleadings stage to a litigation challenging a controlled-company sale to a third party if the transaction is subject to the protections proscribed in MFW II, even when the controller received disparate consideration for its shares.

While analogizing the “disparate consideration scenario” to a squeeze-out transaction, the court did caution that “strict compliance with the transactional roadmap laid out in [MFW II] is required for the controlling stockholder to earn pleadings-stage business judg­ment deference when it is well-pled that the controller, as seller, engaged in a conflicted transaction by wrongfully diverting to herself merger consideration that otherwise would have been paid to all stockholders.”

The Court of Chancery highlighted one important distinction to the MFW II opinion — timing. It stated that the threshold date for implementing MFW II’s procedural protections derives from “the point where the controlling stockholder actually sits down with an acquirer to negotiate for additional consideration.”

In its opinion, the Court of Chancery acknowl­edged two pre-MFW II cases that arguably fore­shadowed this decision; these being In re John Q. Hammons Hotels Inc. Shareholder Litigation; and Southeastern Pennsylvania Transportation Authority v. Volgenau, which are reviewed in the paper.

The authors note that Martha Stewart Living Omnimedia extends the body of recent Delaware case law deferring to the decisions made by independent directors and informed stockholders, and incentivizing control­ling stockholders and directors to insist on procedural protections that allow the parties to mimic arms-length bargaining.

The deci­sion also provides a road map for transactional attorneys seeking to comply with MFW II’s requirements outside of the traditional squeeze-out setting.

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